Floating Yield vs Fixed Rate Yield
- Joel Monteiro
- 21 hours ago
- 3 min read
Updated: 38 minutes ago
In the latest episode of The Flare Factor, we hosted Richard, better known as Finanzgoblin, to discuss Spectra Finance, a permissionless yield platform that’s about to add Flare to its long list of supported networks. Spectra introduces a few innovations to the Flare Network, most notably the concept of Fixed Rate Yield. Given that the majority of FLR and sFLR holders are familiar only with variable APY fluctuations, the introduction of a predictable, a fixed rate instrument is a significant development. In this blog post, we will examine this mechanism and its potential for mitigating yield volatility.
What is Floating Yield?
The term floating yield generally refers to a variable investment return which changes periodically based on a pre-determined benchmark or market conditions. In crypto, when you stake or lend your assets, returns are generally not fixed. Instead, they fluctuate due to changes in utilization, transaction volume, or protocol governance. This variability offers the potential for higher peak returns, but the tradeoff is the inherent risk of unexpected drops in yield. If you've been staked with Sceptre for a while, you've likely noticed that our APY is not the same as it was a year ago. This movement is a direct result of changes in the validators our protocol uses to delegate the wFLR in our pool. Since validator performance directly impacts reward distribution, our displayed APY is periodically adjusted to reflect those changes.
A floating yield can impact a depositor’s expectations on their return, especially in volatile conditions. Nobody wants to stake at a 50% APY just to have it lowered to 20% in a few months. To solve this issue, a few exchanges and staking protocols started offering fixed rate yield opportunities and the first one to do it on the Flare Network will be Spectra. Let’s look at what that means to you.
What is Fixed Rate Yield?
Unlike floating yield, fixed rate yield offers depositors certainty: they can lock up their funds for a set period and are guaranteed to receive the return they initially signed up for. But how do protocols like Spectra achieve this if you’re depositing on a pool subject to the market’s volatility?
To participate in Spectra's Fixed Rates, you need an Interest-Bearing Token. If you’re not familiar with the term, you are definitely familiar with the concept: a token whose value reflects the rewards it accrues over time, just like sFLR! An interest-bearing token serves a double purpose: it represents both the principal (your initial deposit) and the right to its future yield.
Spectra splits the Interest-Bearing token into its 2 parts: the Principal Token (PT) and the Yield Token (YT).
When you deposit into a Spectra pool, you provide liquidity for the Principal Token/Interest-Bearing Token liquidity pool and simultaneously tokenize the Interest-Bearing Token into Principal Token (PT) and Yield Token (YT). Imagine that you have 1000 sFLR and buy a PT with a 10% fixed rate APY and a 1-year maturity. You will receive in return 1100 PT-sFLR, which will let you claim 1100 sFLR after 1 year, when the deposit reaches maturity.
Principal Tokens guarantee that you will always receive the fixed rate you contracted, but what about those Yield Tokens?
What can you do with yield tokens?
The yield tokens you receive for depositing on a pool on Spectra have an implied APY (the one you are guaranteed to receive) and an expiration date (which tells you when your deposit reaches maturity). Because Spectra splits your interest-bearing tokens into 2 parts, you are free to sell the Yield part of the token and collect any rewards you might have accrued up to that point. The Yield Token is sold into the Automated Market Maker.
So which one should you pick?
That’s highly dependent on your appetite for risk. While floating yield generally offers more upside, it can also have unpleasant consequences under less than ideal market conditions. Fixed rate yield will guarantee you a steady APY, but its implied APY will generally be lower at the time you deposit. The integration of Spectra Finance will blend both worlds for Flare users: it unlocks the stability of fixed rate returns alongside the dynamic opportunity of trading yield tokens, providing savvy participants with dual avenues for managing and growing their capital.